Tuesday, December 12, 2006

Dollar: up in smoke?

David Seaton's News Links
The most interesting point this article that I'm featuring from Der Spiegel makes is that the dollar is not just depreciating against the euro, which would be terrible for Europe; it is falling against many other important currencies too. The pound sterling, the Thai Baht, the South Korean Won and the Chinese Yuan are all rising in value against the dollar. This means that they are holding value in relation to each other. This in turn means that contrary to times past if the dollar crashes today it wont drag the rest of the world down with it. The world economy will just chug along buying and selling manufactured goods to each other, while US software, services and agricultural products will be dirt cheap on the world markets. If an American looks underneath any manufactured thing he finds within his reach he or she will probably find that it was made in a foreign country. Let her have a good look, because it may be some time before she can afford to buy it again. DS
The Fall of the Mighty Dollar - Der Spiegel
Abstract: Experts have been predicting for some time that the dollar would eventually go into a nosedive, and now that time seems to have come. The US currency has lost five percent of its value against the euro since late October, and 13 percent since the beginning of the year. The euro is currently fluctuating around a value of $1.33, which is only 3 cents away from its all-time high in 2004. And yet Trichet's counterpart Ben Bernanke, the chairman of the US Federal Reserve, has done nothing but look on as the dollar plunges. A sea change appears to be taking place on the international financial markets. For years, global capital flowed in only one direction, with $2 billion going into the United States every day. Investors viewed the world's largest economy not only as a bastion of stability, but also as a place that promised the best deals, the most lucrative returns and the highest growth rates. The Americans, for their part, welcomed foreign investment. For them, it was almost a tradition to save very little and spend more than they earned -- essentially achieving affluence on credit. Foreigners financed the Americans' almost obsessive consumer spending, which spurred worldwide economic growth for years. Because the US government was unable to fall back on the savings of its citizens, it too was forced to finance its budget deficit with foreign capital. Both consumer spending and the federal deficit kept the dollar high, because the rest of the world was practically scrambling to invest in the United States.(...) Investors worldwide are becoming sceptical and starting to pull their money out of the United States. They have realized that a people and a country cannot live beyond their means in the long term. The US dollar's exchange rate is starting to crumble as a result of this withdrawal. The depreciation is causing growing concern about what will happen to the global economy if the United States loses its role as an engine of growth. (...) The consequences of a declining dollar for the German and European economy will be determined in large part by the way other currencies develop relative to the dollar. "It would be fatal if only the euro were to rise," says DIW analyst Steinherr. "Then it would only be the euro zone that would have to bear the burden of adjustment." But the foreign currency markets suggest a different development, as the dollar is also losing value in relation to other important currencies. The British pound, for example, rose to new highs last week. Even more importantly, the currencies of east Asian growth regions are also appreciating against the dollar. The Thai Baht, for example, gained about 15 percent against the dollar in 2006, while the South Korean Won gained 10 percent. Even the Chinese Yuan, which slavishly followed the dollar in the past, gained more than three percent. Virtually every economy is bearing part of the burden of adjustment.(...) The perils of a currency crash are not nearly as great as they were in the days of the dollar's absolute dominance 30 or 40 years ago. Globalization has led to the development of a number of growth centers in the world economy which share the burden of turbulence. Gone are the days when an American finance minister could boast: "The dollar is our currency, but it's your problem." READ IT ALL

1 comment:

Anonymous said...

In other words, US jobs are going to increase as wages become less expensive in foreign currencies, more emphasis will be put on conservation as imports of foreign raw materials becomes more important, and the Americans who sold their dollars to foreigners can now repatriate them at a much more favorable interest rate. Why is this bad for the US?

For that matter, why is the dollar "up in smoke," or "starting to plummet" when it is about 10% above its low vs the euro two years ago?